'Sum of the Parts' Revisited

 | Dec 21, 2011 | 3:45 PM EST
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Some companies just seem to fall off the face of the Earth. Such is the case with Zapata Corp., an oil company founded by a group that included former President George H. W. Bush. By the time I stumbled onto it, it was still in the oil business but a very different kind of oil -- fish oil. Zapata, a net/net, had morphed into a holding company that at one time owned a large stake in fish oil producer Omega Protein (OME). Controlled by the Glazer family, which also owns the NFL's Tampa Bay Buccaneers, Zapata ultimately sold its stake in Omega and was sitting on a pile of cash with no operating businesses, no investments and, in my view, no prospects. I lost interest.

In 2009, the company reincorporated as Harbinger Group (HRG), a holding company whose mission is to acquire controlling stakes in attractive companies. That's where this sum-of-the-parts story gets interesting. Last January, the company, whose current market cap is $585 million, acquired a 54.5% interest in Spectrum Brands Holdings (SPB), a consumer products company that owns an array of brands in the home and garden, pet supply, battery, and small appliance areas. The stake is valued at $767 million as of late September, if you don't apply a discount.

Last spring, Harbinger acquired Fidelity & Guaranty and Life Insurance Co. for $350 million from Old Mutual, which had reportedly paid more than $600 million for the company in 2001. It's difficult to determine exactly what Fidelity might be worth, but if you assume the purchase price, Harbinger owns more than $1.1 billion in assets between its stakes in Spectrum and Fidelity Guaranty. Adding the company's 19% stake in North American Energy Partners (NOA), which is currently worth about $36.5 million, yields a total value of $1.14 billion, more than twice the company's current market cap.

Based on those numbers, Harbinger appears to be the proverbial "fifty-cent dollar." Unfortunately, it's not that simple. For one, as Spectrum goes, so goes Harbinger. And Spectrum has been struggling lately. If the company, which generated nearly $3.2 billion in revenue in 2011, can get its act together, that bodes well for Harbinger. Also, consider discounting the value of Harbinger's Spectrum stake due to its size. I've seen research that suggests a 35% discount for large stakes in publicly traded companies is not out of line. Even if you applied such a discount, Harbinger's Spectrum holdings would still be worth about $500 million.

But there's another issue that has me in a holding pattern with Harbinger -- a potentially serious issue -- and until I know more, I won't touch the shares. Harbinger Capital, which ultimately controls more than 80% of Harbinger Group shares, and its founder Phillip Falcone, who is also chairman and CEO of Harbinger Group, recently received Wells Notices (a letter indicating the regulator plans to take action) from the Securities and Exchange Commission related to possible securities violations. While my back-of-the-envelope valuation tells me that Harbinger Group shares are undervalued at these levels, it is unclear how the SEC actions might affect the company.



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